Baumol’s Cost Disease

There’s a strange puzzle hiding in plain sight. A television today is cheaper (adjusted for inflation) and far better than one from 1995. Phones? Mini supercomputers in your pocket for a fraction of what early computers cost. But college tuition? Healthcare? Childcare? They seem to rise like they’re training for the Olympics.

What’s going on?

The answer lives in a concept called Baumol’s Cost Disease, named after the economist William J. Baumol. The idea is beautifully simple. Some industries become more productive over time. Others… don’t.

Let’s break that down. Productivity means how much output you get per hour of work. In manufacturing, productivity has exploded. One factory worker today, with automation and software, can produce far more than a worker decades ago. That’s why electronics get cheaper.

But now consider a string quartet playing a piece by Ludwig van Beethoven. In 1820, it took four musicians about 40 minutes to perform it. In 2026? Still four musicians. Still 40 minutes. No productivity gain. You can’t automate a live performance without fundamentally changing it.

Here’s the twist: wages across the economy tend to rise together. If factory workers earn more because they’re more productive, teachers and nurses must also earn more to compete for labor — even if their productivity hasn’t changed much. The result? Sectors with low productivity growth (education, healthcare, performing arts) become relatively more expensive over time.

That’s cost disease. It’s not inefficiency. It’s structural.

The weird part? It’s actually a sign of progress. When technology makes goods cheap, we spend more of our income on services that can’t be automated. In 1900, most people spent money on food and clothing. Today, more goes toward healthcare, education, and experiences.

Economic progress shifts what we value — and what feels expensive.

Tomorrow, we’ll look at a concept that explains something even stranger: why markets sometimes fail not because people are irrational, but because they are perfectly rational.